Q&A: Low interest rates

Q&A: Low interest rates

This morning it was suggested that interest rates could remain at or near their current low for the next five years. Those on tracker deals who have seen their rates plummet since this time last year will be rubbing their hands with glee and hoping the Centre for Economics and Business Research (CEBR) has got it right, while anyone with another two years to go on that tracker will be particularly delighted – the CEBR has suggested the base rate could remain at 0.5% until 2011. But how will everyone else fare if the forecast is right?

I am locked into a fixed rate. Should I switch?

It's been frustrating for borrowers on fixed-rate loans who are paying rates sometimes in excess of 6% while their friends on tracker deals have seen their monthly repayments plummet. With the possibly of rates staying low for some time to come it is little wonder you could be getting itchy feet.

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However, whether a change would do you good depends on your circumstances. "For a lot of people it won't make a lot of sense to move to a new deal," Ray Boulger, senior technical at mortgage broker John Charcol, says. "Anybody whose loan-to-value is above 75% or 80% will not find it worth switching to another deal." That is because most lenders are now reserving their cheapest mortgages for borrowers with the largest deposits.

Another deterrant is the early repayment charges (ERCs) attached to mortgages, which could cancel out any savings. Britannia Building Society's 10-year fixed-rate mortgage, for example, has an ERC of 8% in the early years, which means you would need to find a very low rate to make it worth switching.

However, Boulger says borrowers on other long-term fixes sold over the past few years might benefit. Some lenders were recently offering 25-year fixed rates at about 6.5% with ERCs of around 3%. "For anyone on those deals it would certainly be worth considering paying the ERC and moving to a lower rate," he says. Our calculator will help you work out if it is worth switching.

My tracker ends next year. What will happen then?

Unless you line up a new deal and switch straight on to it you will probably move to your lender's standard variable rate (SVR). In some cases the SVR could be lower than the rate you are currently paying, for example if your lender is Nationwide, Cheltenham & Gloucester or Intelligent Finance. Those lenders are committed to keeping their SVRs just 2% above the Bank of England base rate, which means their SVR is lower than the rates on some of their tracker deals.

However, in most cases the SVR will be higher than your tracker rate. Boulger says that for most people there shouldn't be a real payment shock. "Even the people coming off trackers or discount rates and reverting to a higher rate will find in virtually all cases that they move to a lower rate than the one they paid when they initially took out the mortgage," he says.

My special offer has already ended. Should I stay on the SVR?

Figures for remortgaging suggest an increasing number of borrowers are staying on their lenders' SVRs at the end of a short-term fixed- or discount-rate. If you have less than 25% equity in your house you are likely to find the SVR is at least as competitive as any available new deal, if not better.

But you should bear in mind that, unless the small print on your mortgage says otherwise, your lender is quite entitled to change its SVR as and when it chooses. Boulger feels it is unlikely that lenders will raise SVRs in the short term, but adds: "If bank rates do remain low that will tend to put increasing pressures on lenders."

Does this mean mortgage rates will fall?

Not according to Richard Morea at London & Country mortgages. He points out that borrowers who have large deposits are already being offered very competitive deals. Woolwich, for example, is offering borrowers with a 40% deposit a one-year tracker at 1.48% above the base rate, making a pay rate of just 1.98%.

It is first-time buyers who are paying higher rates and Morea says that whether these are cut "depends on the appetite of lenders and how much they want to lend". He adds: "Whether rates start to fall depends on the cost of funding for the lenders – they have been at pains to point out recently that it is not just to do with swap rates and Libor (the London interbank offered rate), there are other factors at play."

Lenders say capital requirements mean it costs them much more to offer a 90% mortgage than a 60% mortgage, so first-time buyer deals could well remain expensive whatever happens to rates.

I have savings. What should I do?

The good news is that while rates have been slashed on many accounts, banks and building societies have been launching new deals to attract money in and build up their balance sheets. Last week, rates were nearing pre-credit crunch levels. The Islamic Bank of Britain is offering a two-year fixed-rate bond paying an equivalent of 4.5% gross, while Yorkshire Building Society is offering 5.3% to savers prepared to lock in for five years.

Obviously, if you think rates are likely to go up or you need access to your savings, you won't want to tie in for so long, but if low rates are here to stay it could be a good move.

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